Head and Shoulders Pattern Trading

Strategy Guide
You’ve been taught when a Head and Shoulders pattern is formed, the market is
about to reverse lower. So, you short the market.

However, the market continues to move higher, and you get stopped out.

I know.

It sucks to lose especially when you’re doing something that’s “supposed” to work.
But as it turns out, there’s more than meets the eye.

That’s why I’ve written this trading strategy guide to help you trade the Head and
Shoulders pattern profitably and avoid the most common mistakes traders make.

You’ll learn:

1. What is a Head and Shoulders pattern and how does it work

2. 2 things you MUST know when trading the Head and Shoulders chart
pattern
3. The Breakout with buildup technique that offers a favorable risk to reward
4. The First Pullback: How to catch a piece of the move even after the
breakdown
5. The Re-test technique to short the market at a higher price
6. Ahead of the Crowd: How to short the Head and Shoulders pattern and
make a profit even before it reaches the neckline
7. This one “trick” improves your odds when trading the Head and Shoulders
chart pattern
8. How to exit your trade for maximum profits

What is a Head and Shoulders pattern and how

does it work?
The Head and Shoulders pattern is a reversal chart pattern.

It consists of four parts:

 1. The left shoulder
2. The head
3. The right shoulder
4. The neckline

Here’s what I mean:

But what does it mean? Let’s analyze it together…

Left Shoulder – The market does a pullback. At this point, there’s no way to tell if
the market will reverse because a pullback occurs regularly in a trending market.

Head – The market trades above the previous high. However, the sellers took
control and push the price lower towards the previous swing low (forming the
Neckline).

Right Shoulder – The buyers make a final attempt to push the price higher, but it
failed to even break above the previous high (the head). Then, the sellers take
control and push the price towards the Neckline.

Neckline – This is the last line of defense for the buyers. If the price breaks below
it, the market could head lower and begin the start of a downtrend.

So basically…

The Head and Shoulders pattern signals a possible trend reversal as the buyers
cannot push the price higher. And the opposite of it is called The Inverse Head
and Shoulders pattern — which signals a possible trend reversal as the sellers
cannot push the price lower.

Moving on:
You’ll learn the biggest mistake traders make when trading the Head and
Shoulders pattern — and how you can avoid it.

Read on…

The 2 things you MUST know before you trade

the Head and Shoulders chart pattern…
You might wonder:

“How reliable is the Head and Shoulders chart pattern?” Well here’s the deal…

Not all Head and Shoulders patterns are created equal.

There are 2 things you must pay attention to:

1. The market structure

2. The duration of the pattern

I’ll explain…

1. The market structure

Yes, the Head and Shoulders is a reversal chart pattern.

But, if the market is in a strong uptrend, it’s unlikely that a simple chart pattern can
reverse the entire move. Instead, the market is likely to continue higher.

An example:
2. The duration of the pattern
Here’s the thing:

A Head and Shoulders that takes 200 days to form is MORE significant than a
Head and Shoulders that takes 20 days to form.

Why?

Because if the market breaks the 200-day Neckline, more traders will get “trapped”
and their rush for exit will increase the selling pressure.

Now, it doesn’t mean you go short immediately when the price breaks the
Neckline (I’ll explain why later).

But for now, remember this…

If you want to find reliable or high probability Head and Shoulders trading setups,
then you must pay attention to the market structure and duration of the pattern.

How to trade Head and Shoulders chart pattern:

Breakout with Buildup
Now…
Most of you would spot a Head and Shoulders pattern and go short on the break of
the Neckline. And where do you put your stop loss?

Above the head.

Here’s what I mean…

Clearly, your stop loss is large and this results in a poor risk to reward.

The market must move A LOT just for you to make 1R on your trade. So, is there a
better way to trade the breakout?

You bet.

And it’s trading breakout with buildup. This means you’ll wait for the market to
form a tight consolidation near the Neckline (or Support). And if the market does
break down, you can reference your stop loss just above the highs of the buildup.

Here’s an example:
The outcome?

You get a more favourable risk to reward compared to setting your stop loss above
the high of the Head.

The First Pullback: How to catch a piece of the

move after the breakdown
You might be wondering:

“But what if the market doesn’t form a buildup and still continues to head lower,
won’t I miss the move?”

That’s a good question.

And that’s why I’m about to share with you a technique called, The First Pullback.

Here’s how it works…

1. If the market breaks down without forming a buildup, then wait for a
pullback to occur
2. If the market does a pullback, then go short on the break of the swing lows
3. Set your stop loss above the highs of the pullback

An example: The First Pullback

Now…

The best pullbacks are those with “shallow” retracement and small-bodied candles.

But what if you get a steep pullback and large-bodied candles?

That’s what I’ll cover next…

The Re-test: How to short the market at a higher

price
There are times the pullback is deeper than you expect. But all is not lost because
you can use The Re-test technique to time your entry and even short the market at
better prices.

Here’s how…

1. If the pullback is deep, then wait for the price to re-test the Neckline (or
previous Support turned Resistance)
2. If the price re-tests the Neckline, then wait for a price rejection (like
Shooting Star, Bearish Engulfing pattern, etc.)
3. If there’s a price rejection, then go short on the next candle
4. Set your stop loss 1 ATR above the swing high

Here’s what I mean: The Re-test

Moving on, you’ll learn how to short the Head and Shoulders pattern before the
herd catches on…

Ahead of the crowd: How to short the Head and

Shoulders pattern and make a profit even before it
reaches the neckline
Do you know you can short the Head and Shoulders pattern before the Right
Shoulder is formed?

This offers a favourable risk to reward on your trade — and you’re IN the money
even before the Neckline is broken. Want to know this little-known technique?

Here’s how…

1. Wait for the market to form the Left Shoulder and Head
2. After it’s formed, let the price rally higher back towards the Head
3. Go short when you get a price rejection (like Shooting Star, Bearish
Engulfing pattern, etc.)
4. Set your stop loss 1ATR above the swing high

Here’s an example: Ahead of the Crowd

Clearly, if the market drops lower, you’re positioned to ride the move down while
other traders scramble to “chase” the market.

Heh.

This one “trick” improves your odds when

trading the Head and Shoulders chart pattern
Now let’s take things a step further. If you want to find the highest probability
Head and Shoulders trading setup, then you must use multiple timeframes.

Here’s what to look for…

1. The higher timeframe is in a downtrend

2. The Head and Shoulders pattern “lean against” Resistance on the higher
timeframe

An example: Bitcoin coming into Resistance on a 4-hour timeframe…

Bitcoin forms a Head & Shoulders pattern on the 1-hour timeframe…

And then, you can use any of the 4 techniques I’ve shared earlier to time your
entry.

How to exit your trade for maximum profits

You’re probably wondering:

“So how do I exit my winners?”

Well, here are 3 techniques you can use…

1. Trailing stop loss

2. Price projection
3. Capture the swing

Let me explain…
1. How to trail your stop loss and ride big trends
If you’ve followed me for a while, you know I like to trail my stop loss to ride
massive trends.

So, one way you can do it is to trail your stop loss with the 20-period moving
average (MA). This means you’ll only exit your trade if the market closes above
the 20MA.

For example:

2. The Price Projection

This is a classical charting technique that determines where the move might end.

Here’s how it works…

1. Identify the length from the Head to the Neckline

2. “Copy and paste” the length from the Neckline downwards

An example:
3. Capture the swing
This is for The Re-test and Ahead of the Crowd technique. The idea behind it is to
capture one swing in the markets — and that’s it.

Here’s how…

1. Identify the swing low where buying pressure is likely to step in

2. Exit your trade before the swing low

Here’s what I mean…

Now some of you might be wondering:

“So which is the best approach to exit your winners?”

Here’s the thing…

There’s no best approach. Instead, you must know what your goals are and then
apply the appropriate technique.

For example…

If you want to ride massive trends, then you’ll use a trailing stop loss.

If you want a higher win rate, then you can use Capture the swing.

And etc.

Conclusion
Here’s what you’ve learned:

 The Head and Shoulders pattern signals a possible trend reversal as the
buyers cannot push the price higher
 Not all Head and Shoulders patterns are created equal. You must pay
attention to the market structure and the duration of the pattern
 4 techniques to trade the Head and Shoulders chart pattern. This includes the
Breakout with Buildup, The First Pullback, The Re-test, and Ahead of the
Crowd
 You can improve the odds of your trade when The Head and Shoulders
pattern lean against Resistance on the higher timeframe
 3 approaches to exit your trades: The trailing stop loss, The Price Projection
and Capture the Swing

Now over to you…

How do you trade The Head and Shoulders pattern?